Philippine banking institutions and nonbank financial intermediaries, such as

commercial banks, specialized government banks, thrift and rural banks, offshore banking units,
building and loan associations, investment and brokerage firms, and finance companies, made
up the country's financial system in the early 1990s. The Securities and Exchange Commission
and the Central Bank continued to exercise regulatory and oversight authority. Although the
Philippines had a fairly advanced banking system, there was little financial intermediation
compared to the size of the economy. A number of system-strengthening policy reforms were
started in the late 1970s and early 1980s, but the financial crises of 1981 and 1983 prevented
them from having the full impact they had intended. Since 1986, the financial sector has been
working on recovery. The government-owned Philippine National Bank was the biggest
commercial bank in the Philippines up to the economic crisis of the mid-1980s. The Philippine
National Bank, founded in 1916 to offer agricultural loans for export crops, was responsible for
25 to 30 percent of commercial banks' assets in the 1970s and early 1980s. The Philippine
National Bank's asset share had decreased by 50% by 1987 as a result of the accumulation of
nonperforming assets. Twenty privately held domestic banks operated in the commercial
banking sector in 1988, together with four international bank branches. Foreign investment in
banking has been capped at 40% of domestic bank equity ever since the General Banking Act of
1948 was passed. Around P330 billion worth of assets made up the whole commercial banking
sector in 1988.

The Development Bank of the Philippines, the Land Bank of the Philippines, and the
Philippine Amanah Bank were all under the jurisdiction of the Philippine government in 1991.
Long-term financing was supplied by the Development Bank of the Philippines, which was
founded in 1946 with the intended goal of facilitating postwar rebuilding. It provided 15% of
the medium-term loans and 47% of the long-term loans. More than 70% of its loans were given
to business. The government's land reform initiative was funded by the Land Bank of the
Philippines, which was founded in the early 1970s. In the middle of the 1970s, the Muslim
community in the southern Philippines was served by the Filipino Amanah Bank. Since 1977,
offshore banking organizations have been able to conduct business in the Philippines. Since
1977, select domestic banks have also been permitted to accept deposits in foreign currencies
and conduct foreign currency lending. The Central Bank heavily supervised the commercial
banking industry and engaged in significant rediscounting activities from its founding in 1948
until 1980. Administratively determined interest rates were typically lower than the market
clearing rate. Short-term loans from commercial banks are frequently given to well-known,
reputable borrowers. The system experienced periods of instability, which included a number
of bank runs and failures. A number of laws were passed in 1980 at the World Bank and IMF's
behest to boost financial sector competition, improve efficiency, and expand borrowers' access
to long-term financing. Expanded commercial banking, sometimes known as "unibanking," is a
practice wherein large banks that have a net value of at least P500 million combine their
commercial and investment banking operations. Eight unibanks, including the Philippine
National Bank, existed in 1988. When interest rates switched from being controlled by the
government to being set by the market in 1983, there had already been more deregulation.

Interest-rate caps had caused credit rationing and an excessive demand for loans. The
Malacaang Palace influenced loans made to state-owned banks, which decreased the strength
of bank portfolios. It was believed that such activity would be more challenging and less
lucrative under a market-determined interest rate. A series of crises struck the Philippines,
though, before the interest rate reform could be implemented and before the enlarged
commercial bank reform had an effect on the banking sector, destabilizing the nation's financial
system.

Benigno Aquino was a political competitor of Marcos who was assassinated, and this led
to an economic and political crisis that virtually brought down much of the financial sector,
especially the smaller institutions. The sharp devaluations of the peso between 1983 and 1985
resulted in significant losses for the bigger banks. Commercial bank loans rose modestly in
1984, but decreased by approximately 30% in the two years that followed (from P116 billion to
P83 billion), before rising once more. For those three years, inflation reached close to 80%. A
number of financial institutions failed, including the three biggest investment houses, three
commercial banks, the majority of the more than 1,000 rural banks, and the country's largest
savings bank. The two biggest financial intermediaries, the Philippine National Bank and
Development Bank of the Philippines, went bankrupt.

The Philippine National Bank and the Development Bank of the Philippines undertook a
rehabilitation effort under the Aquino administration. The government acquired the two
institutions' nonperforming assets in 1986, which decreased the value of the assets held by the
Philippine National Bank and the Development Bank of the Philippines by 67 and 87 percent,
respectively. These two banks' relative significance in the financial industry drastically
decreased. On the other hand, there was an increase in concentration in domestically owned
commercial banks. The five biggest private domestic commercial banks between the middle of
the 1950s and the beginning of the 1980s had around 35% of the total assets of the private
domestic commercial banks. The proportion had reached almost 55% by 1988. Two-thirds of all
commercial bank assets, up from 56% in 1980, were comprised of the assets of the five private
domestic commercial banks, the Philippine National Bank, and the two largest overseas branch
banks.

An estimated P7.9 billion in after-tax earnings were produced by the six major
commercial banks in 1990, an increase of 42 percent over 1989 and a 32 percent gain over
1988. Filipino banks had the widest interest rate spread (loan rate minus deposit rate) in
Southeast Asia, according to a 1991 World Bank document.